Question

Provide an instance in which favorable variances are just as important to understand as unfavorable variances. What type of inventory control considerations do you think are occurring with the use of variance analysis?

Answer 1

A favorable variance is a situation when the anticipated cost was higher than the actual. For instance, a company may experience a favorable variance in the revenues when introducing a product in a new market. This will enable the managers to increase their sales in that particular market since there may be potential for growth in market share in the new market.

When the system quantity on hand exceeds the physical quantity on the floor, this is a negative or unfavorable variance. This variance analysis helps the firms to understand and analyze the reasons for inventory differences. A probe could reveal instances of theft or spoilage during storage of inventory. This could also be due to waste, unbilled sales, duplicate vendor invoices, higher than expected product costs, or chronic errors. The analysis will also help the management to review its inventory valuation methods.